Our Directors report continued concern over the inability of government to control inflation. The general trend of economic activity exhibits little change from recent months. Housing construction remains weak and the lumber and plywood industry is cutting employment. Agriculture in the District, except for beef, is experiencing an excellent year. Business investment remains heavy although some planned expenditures may be revised downwards. Banking conditions reflect the economy and are basically unchanged with good loan demand but little change in deposits.

The difficulty of controlling inflation remains the major policy concern of our Directors; there is a need for more strenuous efforts by the Federal Government to reduce its budget deficits in order to reduce the burden on the Federal Reserve. Directors support a steady monetary policy integrated with use of all the powers of the Federal Government to control inflation. An additional concern of some Directors is the need to prevent any failures of large banks in view of a growing uncertainty about the soundness of the banking system. Failures would have a domino effect on small banks who have purchased CD's of the large banks.

General conditions in the economy do not appear to have changed. Consumer spending is reasonably good, but there are weaknesses in spending for durables and a decline is expected in automobile purchases. The weakest section remains construction. Housing construction shows no sign of recovery, and further declines in apartment construction are reported. Public construction is lower in several states because of higher interest and other costs.

Most of our Directors reported little or no change in investment plans in their regions, and overall, investment activity appears to be strong. However, instances of revisions in plans are reported by several Directors. Public utilities are having difficulties in floating issues. One large utility has made major reductions in its long-term construction budget, reportedly cutting $l billion out of planned capital budget between now and 1985. Rising construction costs have also led other firms to revise their plans. For example, a large California dairy canceled a project originally estimated at $3-l/2 million when the estimate was revised to $5 million. Other firms have postponed projects in expectation of lower interest rates next year.

Recent increases in capacity are beginning to reduce supply shortages. One bank reports that California electronics components manufacturers in San Mateo and Santa Clara counties have expanded capacity sufficiently so that supply now nearly matches demand. In petrochemicals, some price cuts have occurred already due to the emergence of excess supply. In the steel industry, demand is still high, but it may not remain so. The price differentials between U.S. and foreign steel prices have narrowed, and foreign competition is becoming more serious. There is still a waiting period for steel and users must accept a restricted allocation. However, some buyers have canceled their steel order allocations, and this action often indicates a softening in demand. At the moment, the majority of our Directors think sales of automobiles in 1975 will be weak. Recent price rises have stimulated sales of leftover 1974 models, but this is expected to be at the expense of 1975 sales. In addition to higher posted prices, problems of obtaining finance and the prospects of higher gasoline prices are also discouraging buyers. Dealers are receiving requests for 48-month contracts by customers. Foreign car demand is not likely to be better either, particularly since U.S. compact car prices are reasonably competitive. Japanese cars remain in the best position in terms of sales activity, but European sales are lower; domestic truck sales, in contrast, appear to be good.

Agricultural prospects in the District are reported to be excellent. Ten percent smaller crops are reported for wheat, potatoes and apples, but price rises more than offset the lower production and farm income continues to grow. The only exception to this picture is beef, where producers face rising costs with unchanged demand.

Bankers report loan demand is strong but deposits show only slight change. Some banks have experienced a shift from demand to time deposits, and others report a continued drain of deposits because of small investors shifting to government or government guaranteed issues.